CONSUMER BEHAVIOR

Rational Consumer:

A rational consumer is considered to be that person

who makes rational consumption decisions.

In other words, the consumer who makes his choices

after considering all the other alternative goods (and
services) available in the market is called a rational
consumer.
It is assumed that the satisfaction a consumer gets by consuming a
good is measurable (measured in terms of money)
though in real life it is not possible to measure satisfaction because it
is psychological entity.
We only feel the level of satisfaction and express the same in
different ways. We show our satisfaction by our behavior like
laughing, jumping in excitement or in any other way.
Thus, we cannot measure satisfaction in quantitative terms as we are
capable of measuring time in seconds, weight in kilograms or length
in meters.
Further, each consumer is also assumed to be known of what he
wants. Moreover, he has all information regarding market—the
goods available, the prices of the goods at a particular point of time
and so on.
Every consumer uses this information in such a way as to maximize
his total satisfaction.
Utility:
Utility is defined as the power of a commodity or
service to satisfy a human want.
Economists have leveled the term satisfaction as utility.
It is subjective concept and therefore varies from person
to person.
As already stated, it resides in one’s mind and therefore
cannot be measured in quantitative terms. Though
utility and satisfaction are used synonymously.
Cardinal Utility:  
approach is propounded by neo-classical economists,
who believe that utility is measurable, and the customer
can express his satisfaction in cardinal or quantitative
numbers, such as 1, 2, 3, and so on.
The neo-classical economist developed the theory of
consumption based on the assumption that utility is
measurable and can be expressed cardinally (in
numbers). And to do so, they have introduced a
hypothetical unit called as “Utils” meaning the units of
utility.
Total Utility:
It is the amount of utility; a consumer gets by consuming
all the units of a commodity.
If there are “n” number of units of the commodity then the
total utility is the sum of the utilities of all “n” units of the
commodity. Thus, if there are four units of a commodity,
then total utility is,
U=U1(n1) + U2(n2) + U3(n3) + U4(n4)
Where U = total utility; U1…….U4 are the utilities of
n1…..n4 units of the commodity.
Thus, if by consuming first apple, a consumer gets 12 utils
of satisfaction, 10 utils from the second apple, 9 utils from
the third and 7 utils from the fourth apple; then his total
utility is, U = 12 + 10 + 9 + 7 = 38
Marginal Utility:
Marginal utility is defined as the change in the total utility due
to a unit change in the consumption of a commodity per unit
of time.
It can also be defined as “the addition made to the total utility
by consuming an additional unit of a commodity”.
For example, if total utility of 3 cups of tea is 18 utils and on
consuming the 4th cup it rises to 20; then marginal utility 20-
18 = 2 utils.
Thus, by consuming one more cup of tea, the additional utility,
a consumer gets is 2 utils. Marginal utility can be expressed
as,
MU =∆TU/∆Q
Where
MU = marginal utility
∆ΤU = change in total utility
∆Q = change in the quantity consumed.

The following expression can also be used to find

marginal utility:

MU = TUn – TUn-1
Where, TUn is the total utility of nth unit of the
commodity and TUn-1 utility from the n-1th
commodity.

Thus, if TU from the second unit (nth unit) of apple is

13 and TU from the previous unit (n-1) is 7, then MU is
13 – 7 = 6.
The concept of total utility and marginal utility is shown in the
utility schedule below:

Units TU MU
1 7 -----
2 13 13 – 7 = 6
3 18 18 – 13 = 5
4 22 22 – 18 = 4
5 25 25 – 22 = 3
6 27 27 – 25 = 2
7 28 28 – 27 = 1
8 28 28 – 28 = 0
When the consumer takes 1st apple, his total utility is 7
and from the 2nd apple he gets 13 and so on.

The third column shows marginal utility, which

diminishes as the consumer increases units of apples.

It is seen that when total utility is maximum, marginal

utility is zero at 8th unit of apple.
It is also seen that total utility is the sum of the marginal
utilities of the 1st,2nd, 3rd,and so on. Thus, at 8th unit of
apple,
TU = MU1+ MU2+ MU3+ MU4+…..…+ MU n(8)
28 = 7 + 6 + 5 + 4 +…..…+ 0
 Law of Diminishing Marginal Utility
One of the very important laws in regard to the
satisfaction of human wants is known as law of
diminishing marginal utility.
The law explains common feeling of every consumer.
Suppose a person starts consuming apples one after
another.
The first apple gives him the maximum satisfaction as he
might be in mood of taking some food at that time for
meeting his appetite. As he takes the second apple, he
gets less satisfaction because by this time he has already
met some level of appetite.
The third and more apples yield him lesser satisfaction
or utility.
It means that every time the consumer increases his
consumption, he gets less and less satisfaction.
The satisfaction also tends to be zero when the
consumer feels totally disgusted to take any more
apples.
If he takes more, his satisfaction turns negative or utility
now becomes disutility.
Thus “law of diminishing marginal utility states that
additional satisfaction a person derives by consuming a
commodity goes on declining as he consumes more and
more of a that commodity”.
According to Marshall, “The additional benefit
which a person derives from a given increase of his
stock of a thing diminishes with every increase in
stock that he already has.”
Limitations of Law of diminishing Marginal Utility:
The law of diminishing MU has certain limitations.
These are:
1. The units consumed must be homogeneous. i.e.
having same size, and shape.
2. Units consumed must be continuous.
The law does not hold good when there is enough time
gap between consumption of two units. For instance, if
we take second apple after a long gap of time, we may
feel hungry and hence satisfaction will increase instead
of falling.
3. The taste of consumer should not change.
It means that the person should consume all units of a good by
same desire and pleasure.
4. The law does not apply to money as it is said that

more money a person has, the more he wants.

5. Income of consumer must be constant.
Change in income of the consumer will falsify the law. If
money income of the consumer increases or decreases during
the time of consumption of a particular set of goods, the
marginal utility will not fall as said above.
6- Only one commodity must be consumed at a time
7- No substitute or complement be introduce.
Units TU MU
1 10 10 – 0 = 10
2 18 18 – 10 = 8
3 24 24 – 18 = 6
4 28 28 – 24 = 4
5 30 30 – 28 = 2
6 30 30 – 30 = 0
7 28 28 – 30 = -2
Positive economics addresses questions such as
“what is unemployment?” whereas normative
economics addresses questions such as “what
should the government do about
unemployment?